Come one, Come all
20 October 2016
The environment is ripe for new actors to enter this market. Stephen Malekian, Head of US business development at Elixium, speaks to the RMA daily review at the 33rd Annual conference on Securities lending.
What is Elixium’s core offering?
Elixium is a wholly owned subsidiary of Tradition, which is a UK interdealer-broker that provides a marketplace where all-to-all trading can take place electronically. Collateral and liquidity providers are able to come together to trade bilaterally on a standardised basket of securities cleared bilaterally, or through a central counterparty (CCP) or a triparty agent.
Elixium is looking to move into the US market in the near future. What opportunities do you see there?
In Europe, repo is used by roughly 15 percent to 20 percent of corporate treasurers as a funding tool. In the US that figure is closer to 85 to 90 percent, it’s enormous. Therefore, the problems we see in Europe will be all the more acute in the US.
In Europe, the market is still on a learning curve but in the US they are far more educated and on-board with the idea of secured lending because there are so many people doing it.
You’ve taken the helm of Elixium’s new US business. What’s your experience prior to joining the company?
I have a fairly simple background. I first joined Salomon Brothers in 1981 and I’ve since been involved in the repo market from 1984. I ran the US repo desk from 1992 and then was put in charge of the global desk in 1997 after Citibank and Travelers Group merged to form Citigroup.
After that I moved to Barclays in London to run its European and Asian fixed income financing business from 2011 until 2014. All of my 35 years of experience has been on the sell side so far, so this is a new experience for me.
What is it about Elixium’s offering that’s so attractive?
Since the financial crisis a regulatory corset has been placed upon the banking system that has challenged the high-volume, low margin activities like repo to meet the returns hurdles on a bank’s cost of long-term capital. As a result of these constraints, it’s safe to say that the net balance sheet of banks has been reduced by around 80 percent across the spectrum of fixed income.
Therefore, outside of a ‘platinum’ group of banking clients, there are many collateral and liquidity providers that banks are no longer able to offer access to the balance sheet in the same way as before—and that’s where Elixium comes in.
Elixium’s aim is to attract and pool together collateral and liquidity in a fragmented market.
As a multilateral trading facility we have to treat all our clients the same and that’s what the regulators like about us. For the first time, everyone in the market has access to liquidity electronically through pre-approved credit lines, cleared either bilaterally or through a CCP or triparty agent.
Anyone is able to trade on our platform that has the pre-approved credit lines and the appropriate legal documentation. We envisage our client base to come predominantly from the buy side as they are the ones that had balance sheet access but are now being constrained and subjected to much wider spreads, or both.
There are also buy-side entities that are now expected to need more liquidity due to new regulatory requirements, such as those around over-the-counter (OTC) derivatives, where initial and variation margin rules have necessitated the mobilisation of high-quality liquid assets (HQLAs) to generate cash.
How does your platform work with CCPs?
The Elixium platform itself is not restrictive to a membership such as a bank to non-bank CCP, but our clients can easily choose to meet on the platform and then post-trade decide to give the trades up to a CCP if both are members. That’s the beauty of the platform, all doors are open.
So the new regulatory landscape has really created a gap in the market for you?
Absolutely. This platform wouldn’t exist without the regulation we have now because it’s choking the market to a point where there’s a lot of collateral out there but it has become difficult to get it to the people that need it.
It’s so important that we, as a market, fix this problem because otherwise the flows of money that we all rely on will simply dry up.
A lot of people are too focused on dealing with the changes in the long-term financing market, but if we don’t sort out the issues with the day-to-day cash markets then that’s going to affect everyone a lot sooner.
The banks know they can’t keep doing business the way they have been and it’s time for them, and the whole market, to evolve.
If regulation is driving your clients’ demands for your services, do you expect appetite to increase as more stringent requirements are implemented?
Yes, and we’re seeing this now. Money market reform, the second phase of which is coming up on 14 October, is already causing the funds/LIBOR basis to widen.
There’s also the triparty reforms, which have reduced the amount of triparty activity that’s being done due to the time constraints on filling and unwinding triparty trades.
This means there is now more bilateral trading, which really goes against the grain of what the regulators intended to achieve. The end of J.P. Morgan and BNY Mellon interoperability of GCF Repo also contributes to the overall fracturing of the market.
When you put all of this together, it adds to the overall low liquidity and volumes and increased volatility in the cash market. Elixium’s platform will help alleviate that by mobilising collateral and increasing the liquidity.
We believe that regulators will look upon this model for an open marketplace favourably.
Counterparties that traditionally haven’t had the ability to trade together can now come together without assuming any more risk. It’s an end to fragmentation.
At the same time, our clients are able to gain greater visibility with regard to transparency, best price and best execution, meaning that it’s all moving towards what the regulators want when it comes to future compliance with rules such as the second Markets in Financial Instruments Directive.
You sat on a panel during this year’s RMA conference that looked at how the traditional value chain might change. Can you offer a flavour of what was discussed?
I think the days of expecting banks to be the sole credit intermediator between buy-side cash and collateral providers have gone due to fundamental changes.
Between the ratios on capital, leverage and liquidity that banks are trying to be compliant with, and the needs of buy-side participants to access the repo market at closer-to-market prices, the environment is ripe for new actors to enter this market.